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What is Compound Interest?

Compound interest arises when interest is added to the principal of a deposit or loan, from that moment on the interest that has been added also earns interest. This constantly adding interest to the principal is called “compounding”. Compounding interest is like a snowball rolling of a very long hill. It will start as a small ball but further down the hill it will collect so many snow (“interest”) that it has doubled many times it original size.

Albert Einstein ones called Compounding Interest the 8th (eight) wonder of the world.

Compound Interest can work for you, or against you. When you invest your money it will works for you. When you borrow money it works against you.

In the financial world there is one famous rule called “Rule of 72“. This rule provides you in a very easy calculation how many years it would take, to double adding the interest to the capital. Example:

Let’s say you get 10% interest per year. Take the number 72 and divide it by the interest, so you get 72/10 = 7.2 So it would take roughly 7 years to double your investment by a interest rate of 10%. The Rule of 72 is remarkaly accurate, as long as the interest is below 20%.

The Rule of 72 also works to estimate how high the interest must be to get your money back in a specific amount of years. Lets say you want to double your money in eight years, with the Rule of 72 you just divide 72 by 8 years and the Rule of 72 will tell you it would take about 9 percent annually.